FSA vs HSA: Which savings account makes sense for you?

If you’re graduating from college and have a job offer with benefits, you’re in great shape, but what about saving for medical expenses? You might think if your job offers health insurance you’re good, but are you prepared to pay for an emergency medical bill? Even if your plan has a low deductible — like one that’s less than $1,000 — it can still catch you off guard.

That’s where special savings accounts can come in. The two most popular are Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs).

Flexible Spending Accounts

FSAs were established in the 1970s; they are tax-advantaged savings accounts offered by your employer that have no eligibility requirements. You can contribute pre-tax dollars to an FSA to pay for qualified health expenses throughout the year, which means the money will come out of your paycheck pre-tax, lowering your overall tax burden for the year. Qualified health expenses can be anything from your doctor visit copay to prescription eyeglasses. Because FSAs are offered through your employer, you won’t be able to take it with you if you start a new job.

You can contribute a maximum of $2,650 in 2018. But be careful: Don’t put too much money into an FSA because if you don’t use it by the end of the year, it’s gone. Do the math and try to figure out how much you expect to spend on healthcare — How many times will you visit your doctor? How many prescriptions do you have? — to get a rough estimate of how much to put into your FSA. Some companies let your money roll over a little bit but many don’t, so be sure to check your company’s policy.

The other thing to be careful about is you can only change your FSA contributions during open enrollment or if you qualify with special circumstances, like the birth of a child or a new job. Once you’ve set the amount to contribute, you’re locked in for the year, so try to really plan out how much you expect to spend on healthcare as much as possible.

Health Savings Account

HSAs are similar to FSAs in many ways, but there are some subtle differences. To be eligible for an HSA, you must have a high deductible health plan, a specific type of health insurance plan — not just any plan with a high deductible (as this writer found out the hard way).

Since most HSAs are not tied to your job, you can take it with you from employer to employer, though although some companies do offer them and treat them like 401ks. Some HSAs are set up as simple savings accounts, like FSAs, but some HSAs can be invested to grow your savings. HSAs can also be used as a secondary (or even tertiary) retirement account if you don’t use all of the money by the time you’re eligible to take retirement distributions.

HSAs are tax-deductible rather than pre-tax since your contributions are not coming out of your paycheck before the money gets to you (unless it’s a plan offered by your company, in which case it can be pre-tax). This means you’ll have already paid taxes on the money you save in your HSA, but you’ll be able to deduct your contributions on your tax return.

You can contribute up to $3,450 to an individual HSA in 2018 and up to $6,850 for a family.

Be sure to do the research before you make a decision in order to make the right choice for you and your family.